IMPORTANT USAC DEVELOPMENT IMPACTING LIRE-ELIGIBLE FCC FORM 499 FILERS WITH AFFILIATES PROVIDING INTERSTATE TELECOMMUNICATONS
In April of 2012, the Federal Communications Commission (“FCC” or “Commission”) released its Universal Service Fund (“USF”) Reform Notice of Proposed Rulemaking (“NPRM”) wherein it sought comment on whether it should modify or eliminate the Limited International Revenue Exemption (“LIRE”), which exempts international revenues from a USF contributor’s contribution base if they represent over 88% of its combined interstate and international end-user telecommunications revenues. Since then, it has become apparent that the FCC, and in particular, the Commission’s Wireline Competition Bureau (“Bureau”) is targeting the international telecommunications sector of the industry as an opportunity to bolster the dwindling USF.
LIRE derives from an FCC decision in response to the ruling of the U.S. Court of Appeals for the Fifth Circuit in the so-called “TOPUC” case in 1999. In TOPUC, the Fifth Circuit found that requiring international carriers to contribute more to the USF than they could generate in interstate end-user revenues violated the “equitable” and “non-discriminatory” mandates of Section 254(d) of the Communications Act. In response to TOPUC, the FCC created LIRE, codified at 47 C.F.R. § 54.706(c), which provides that, in calculating percentages of interstate and international revenue for purposes of LIRE, the calculation “shall include all of that entity’s affiliated providers of interstate and international telecommunications and telecommunications services.” It is apparent that the rule was intended to capture only the revenue of non-filing affiliates (i.e. affiliates that provide telecommunications services but are not required to file Forms 499 such as de minimis providers, broadcast and self-providers/systems integrators). The USF administrator, the Universal Service Administrative Company (“USAC”), however, has interpreted Section 54.706(c) to require inclusion of the revenues of ALL of a filer’s affiliates (non-filers and independent filers alike) to evaluate LIRE qualification.
USAC has engaged in this analysis unbeknownst to affiliated filers that do not coordinate their 499 revenue reporting practices. USAC reviews Forms 499 and searches for companies that identify a common parent/holding company in Line 106 of the Form 499-A/Line 105 of the Form 499-Q in order to identify “affiliates” (an affiliate is defined as an entity with 10% or more common ownership). USAC then treats all entities identifying a common parent/holding company as affiliates and combines their revenues “behind the curtain” for purposes of determining whether any individual affiliate qualifies for LIRE. As a result, while an individual 499 Filer may be LIRE-eligible on a stand-alone basis (or when revenues from affiliated non-499 Filers are considered), the same company may lose its LIRE qualification when revenues from other affiliated filers are combined with its revenues by USAC.
The net effect of USAC’s actions is to diminish the availability of the LIRE exemption, thus exposing larger swaths of international telecommunications revenue to USF contributions. The loss of LIRE eligibility of a single affiliated entity could result in material financial harm to the affiliate and its related companies.
We strongly encourage clients with international revenues and having Form 499 Filing affiliates to seek legal advice regarding the implications of USAC’s LIRE eligibility process. Clients with questions regarding this matter may contact Jonathan S. Marashlian at (703- 714-1313 or by email: email@example.com.